According to a research report, following a significant correction in the pharmaceutical sector in the first half of the year, valuations for both innovative and non-innovative drugs have fallen to historical lows. The focus for the second half of the year will be on variables in the national healthcare insurance system and the realization of clinical trial data for innovative drugs. The investment approach involves seeking out hard technology in healthcare and considering the cash value of companies. Recommendations include focusing on innovative drugs (leaders with Best-in-Class and First-in-Class pipelines), the innovative drug industry chain (CXO, life sciences upstream), innovative medical device exports (imaging, high-value consumables, consumer medical devices, etc.), and the medical AI sector. Attention should also be paid to the recovery of medical services and third-party ICL (Independent Clinical Laboratories). The main viewpoints from the report are as follows:

Internal and External Factors Lead to Sector-Wide Decline

In the first half of 2026, the pharmaceutical sector experienced overall volatility and decline. As of June 8th, the SW Pharmaceutical Index fell by 13.6%, underperforming the CSI 300 Index by over 15 percentage points. Among sub-sectors, only medical services and medical devices showed relatively smaller declines. The analysis attributes this primarily to: non-innovative drug segments being pressured by weak domestic healthcare recovery and cost-control measures in the national healthcare insurance system; and the innovative drug segment, particularly in Hong Kong-listed stocks, being affected by geopolitical tensions and expectations regarding U.S. Federal Reserve interest rates, leading to a trend-driven downturn. Regarding institutional holdings, public fund allocations to pharmaceuticals saw a slight increase in Q1 2026, but overall positions remain significantly below historical averages. Institutional funds are concentrating in CXO and leading innovative drug companies. It is anticipated that the proportion of institutional holdings in pharmaceuticals may decline further in Q2 2026 against the backdrop of strong AI-related assets.

Strong Momentum in Innovative Drugs, Continuously Supportive Policies

On the industry front, innovative drug BD (Business Development) transactions in Q1 2026 continued the high momentum from 2025, reaching $61.4 billion for the quarter alone. Companies like CSPC Pharmaceutical Group Limited, Innovent Biologics, Inc., and Jiangsu Hengrui Pharmaceuticals Co., Ltd. successively secured multi-billion-dollar cross-border platform collaborations, with cooperation models evolving from single-product licensing to comprehensive platform co-construction. In terms of performance, leading innovative drug companies generally achieved over 30% revenue growth in 2025. Amidst zero growth in the broader pharmaceutical industry, innovative drugs stood out, with innovative drug revenue at Hengrui exceeding 50% of total revenue. Companies like BeiGene, Ltd. and Innovent achieved overall profitability, marking the industry's transition from a period of heavy investment to a cycle of profit realization. On the supply chain front, driven by a recovery in global pharmaceutical investment and financing and BD funds feeding back into R&D, the CXO sector is experiencing strong order books, with leading companies seeing accelerated order backlogs sequentially. Domestic substitution in the life sciences upstream is also accelerating.

On the policy front, the biopharmaceutical industry has been officially upgraded to a national emerging pillar industry. The acceleration of provincial-level coordination in the national healthcare insurance system is revitalizing existing funds, with healthcare insurance expenditure growth expected to stabilize and recover over the next 2-3 years. The State Council Document No. 9 clarifies drug pricing mechanisms, opening up pricing space for high-level innovative drugs upon market entry. In May, new regulations on the management of pharmaceutical representatives, accompanying anti-corruption measures, were implemented, lowering the threshold for criminalizing commercial bribery. This industry compliance overhaul is reshaping the pharmaceutical ecosystem and is expected to significantly alter the clinical drug landscape.

Investment Outlook for the Second Half of 2026: Industry Value Reshaping, Investing in True Pharmaceutical Innovation

Starting May 1st, compliance in medical operations is set to profoundly influence physician prescribing behavior and reshape the industry ecosystem. It is anticipated that significant changes will occur in the competitive landscape for drugs, devices, and diagnostics from the commercial to the industrial level in the second half of the year. Only pharmaceuticals and devices with genuine clinical value will secure leading market positions in this new environment. As the industry separates the good from the bad, innovation remains the primary direction for pharmaceutical investment. For the innovative drug sector in the latter half of the year, focus will be on the release of clinical data for core pipelines (such as ADC and bispecific antibody drugs) from industry leaders like Innovent, Bio-Thera Solutions, Ltd., and InnoCare Pharma. The commercialization of AI in healthcare is accelerating, with large medical AI models deeply integrating into imaging and testing scenarios. Brain-computer interface technology saw the first domestic product approval in China. Attention in the second half should be on the clinical application of medical AI and brain-computer interfaces. With the advancement of provincial-level coordination, a potential turning point in healthcare insurance expenditure is expected, offering a potential opportunity for a bottoming recovery for private medical enterprises in areas like ophthalmology, dentistry, and physical examinations.

Risk Factors: 1. Risk of insufficient growth in pharmaceutical consumption capacity due to increasing macroeconomic pressures. 2. Risk of policies such as innovative drug reimbursement under the national healthcare insurance system falling short of expectations. 3. Risk of global order transfers due to geopolitical factors. 4. Risk of centralized procurement or fee reductions exceeding market expectations.